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FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
---------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 000-22501
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SPECTRUMEDIX CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 25-1686354
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2124 Old Gatesburg Road, State College, Pennsylvania 16803
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(Address of principle executive offices)
(Zip Code)
(814) 867-8600
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of:
Date September 30, 1998 Shares 3,515,214
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SPECTRUMEDIX CORPORATION
QUARTERLY REPORT
QUARTER ENDED SEPTEMBER 30, 1998
CONTENTS
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets -- September 30, 1998 and March 31, 1998................................ 1
Condensed Statements of Operations - Six and Three Months Ended September 30, 1998
and September 30, 1997........................................................................... 2
Condensed Statements of Cash Flows - Six Months Ended September 30, 1998 and September 30, 1997.. 3
Notes to Financial Statements.................................................................... 4-5
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition............... 6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 18
Item 2. Changes in Securities and Use of Proceeds............................................... 18
Item 3. Defaults Upon Senior Securities......................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders..................................... 18
Item 5. Other Information....................................................................... 19
Item 6. Exhibits and Reports on Form 8-K........................................................ 19
(a) Exhibits............................................................................ 19
(b) Reports on Form 8-K................................................................. 19
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SPECTRUMEDIX CORPORATION
CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998*
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<S> <C> <C>
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 284,057 $1,680,643
Accounts receivable, net 46,957 12,806
Inventories 431,621 381,393
Prepaid expenses 17,184 49,426
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TOTAL CURRENT ASSETS 779,819 2,124,268
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PROPERTY AND EQUIPMENT, net 427,505 279,717
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OTHER ASSETS:
Patent fees 302,102 216,947
License and license options, net 140,844 159,346
Security deposit 8,479 8,479
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TOTAL OTHER ASSETS 451,425 384,772
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TOTAL ASSETS $1,658,749 $2,788,757
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,241,616 $ 1,132,580
Current portion of long-term debt 24,676 5,041
Customer deposits - 5,960
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TOTAL CURRENT LIABILITIES 1,266,292 1,143,581
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LONG-TERM DEBT, net of current portion 98,492 29,217
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STOCKHOLDERS' EQUITY:
Preferred stock, $.00115 par value, 2,000,000 shares
authorized, none issued or outstanding
Common stock, $.00115 par value, 23,000,000 shares
authorized and 3,515,214 shares issued and outstanding 4,042 4,042
Additional paid-in capital 11,359,673 10,623,823
Accumulated deficit (10,197,606) (8,570,152)
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Total 1,166,109 2,057,713
Less: Deferred compensation (872,144) (441,754)
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TOTAL STOCKHOLDERS' EQUITY 293,965 1,615,959
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,658,749 $ 2,788,757
============ ===========
</TABLE>
* Derived from audited financial statements
1
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SPECTRUMEDIX CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
SIX AND THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
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<CAPTION>
Six Months Ended Three Months Ended
September 30, September 30,
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1998 1997 1998 1997
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<S> <C> <C> <C> <C>
REVENUES $ 131,490 $ 123,421 $ 64,592 $ 36,337
COST OF REVENUES 255,681 176,071 125,597 78,772
----------- ----------- ---------- ----------
GROSS INCOME(LOSS) (124,191) (52,650) (61,005) (42,435)
----------- ----------- ---------- ----------
OPERATING EXPENSES:
Research and development costs, net 676,708 509,856 225,704 247,417
General and administrative expenses 839,694 432,989 478,942 177,173
----------- ----------- ---------- ----------
TOTAL OPERATING EXPENSES 1,516,402 942,845 704,646 424,590
----------- ----------- ---------- ----------
OPERATING LOSS (1,640,593) (995,495) (765,651) (467,025)
----------- ----------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest income 15,403 1,331 4,273 1,331
Interest expense (2,264) (129,286) (1,084) (60,424)
Amortization of original issue discount
and deferred bridge financing costs - (1,674,705) - (394,400)
----------- ----------- ---------- ----------
TOTAL OTHER INCOME (EXPENSE) 13,139 (1,802,660) 3,189 (453,493)
----------- ----------- ---------- ----------
LOSS BEFORE EXTRAORDINARY ITEMS (1,627,454) (2,798,155) (762,462) (920,518)
EXTRAORDINARY ITEMS - 108,136 - 108,136
----------- ----------- ---------- ----------
NET INCOME (LOSS) $(1,627,454) $(2,690,019) $ (762,462) $ (812,382)
=========== =========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 3,515,214 2,219,067 3,515,214 2,264,533
=========== =========== ========== ==========
INCOME (LOSS) PER SHARE:
Loss before extraordinary items $(.46) $ (1.26) $(.21) $ (.41)
Extraordinary items - .05 - .05
----------- ----------- ---------- ----------
NET LOSS $(.46) $ (1.21) (.21) $ (.36)
=========== =========== ========== ==========
</TABLE>
2
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SPECTRUMEDIX CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
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1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,627,454) $(2,690,019)
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Adjustments to reconcile net loss to net cash from operating activities:
Amortization of original issue discount and deferred bridge financing costs - 1,674,705
Depreciation and amortization 37,360 15,404
Interest paid with issuance of common stock - 36,000
Non-cash compensation expense 305,460 103,500
Extraordinary gain on forgiveness of debt - 108,136
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (34,151) 62,805
(Increase) in inventories (50,228) (94,024)
(Increase) in other assets (52,913) (187,338)
Increase in accounts payable and accrued expenses 109,036 (514,833)
Increase (decrease) in customer deposits (5,960) 32,944
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Total adjustments 308,604 1,237,299
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NET CASH USED BY OPERATING ACTIVITIES (1,318,850) (1,452,720)
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CASH FLOWS USED BY INVESTING ACTIVITIES:
Purchase of equipment (72,676) (27,846)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering - 6,903,450
Initial public offering costs - (1,346,456)
Repayment of bridge financing notes - (805,000)
Proceeds from notes payable - others - 500,164
Proceeds from officers' notes - 1,238
Repayment of officers' notes - (75,404)
Repayment of notes payable - others (5,060) (890,892)
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NET CASH PROVIDED BY FINANCING ACTIVITIES (5,060) 4,287,100
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,396,586) 2,806,534
CASH AND CASH EQUIVALENTS - beginning of period 1,680,643 352,290
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CASH AND CASH EQUIVALENTS - end of period $ 284,057 $ 3,158,824
=========== ===========
NON-CASH INVESTMENT AND FINANCING ACTIVITIES:
During the six months ended September 30, 1998 and 1997, additional paid-in
capital and deferred compensation increased by $735,850 and $543,485,
respectively from compensation stock options issued to non-employees.
During the six months ended September 30, 1998, property and equipment of
$93,970 was purchased and capital lease obligations of $93,970 were assumed.
</TABLE>
3
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SPECTRUMEDIX CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
NOTE 1 - GENERAL
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly (a) the financial position as of
September 30, 1998, (b) the results of operations for the six and three
months ended September 30, 1998 and 1997 and (c) changes in cash flows for
the six months ended September 30, 1998 and 1997.
Refer to the audited financial statements for the fiscal year ended March
31, 1998, which were included in the Company's Form 10-KSB for details of
accounting policies and accounts, none of which have changed significantly
in composition since that date except as noted below.
Financial results for the interim period ended September 30, 1998 and 1997
may not be indicative of the financial results for the fiscal year ending
March 31, 1999.
The Company has available carryforward losses applicable to the reduction
of future Federal income taxes aggregating approximately $8,500,000 at
September 30, 1998 and which expire at various dates through 2013.
NOTE 2 - INVENTORIES
Inventories consist of the following:
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<CAPTION>
September 30, March 31,
1998 1998
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Raw materials $295,884 $238,710
Work-in-process 135,737 142,683
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$431,621 $381,393
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</TABLE>
NOTE 3 - STOCK OPTIONS AND WARRANTS
In May 1998, the Company granted options to purchase 68,000 shares of its
common stock to employees under the Company's 1997 Stock Incentive Plan at
an exercise price of $6.25 per share, which was the estimated fair value of
the common stock on the date of grant. The options vest in annual
installments over a four-year period commencing in May 1999 and are
exercisable for a period of ten years from the date of grant.
In August 1998, the Company granted options to purchase 100,000 shares of
its common stock under the Company's 1997 Stock Incentive Plan at an
exercise price of $2.75 per share, which was the estimated fair value of
the common stock on the date of grant. The options vest over a four-year
period commencing in August 1999 and are exercisable for a period of ten
years from the date of grant.
NOTE 4 - COMMITMENTS
In May and June 1998, the Company entered into several consulting
agreements. Under the terms of the agreements, the consultants were issued
options to purchase of the Company's common stock. The options will vest
in equal annual installments over periods ranging from one to three years.
During the six months ended September 30, 1998, the Company recorded
$735,850 in deferred compensation expense related to these options, which
is being amortized over the vesting period thereof.
4
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NOTE 5 - ECONOMIC DEPENDENCY
To date, the Company's revenues have been materially dependent on a limited
number of customers. The nature of the Company's business is such that
during any individual accounting period it may sell its products to a
limited number of significant customers. The Company's existing and
proposed products require high quality raw materials and components that
the Company purchases from third party suppliers. The Company believes
adequate sources of supply exist for all raw materials and components it
will need, and that such items are available on commercially reasonable
terms.
NOTE 6 - LEGAL PROCEEDINGS
Rubin Matter
On April 21, 1997, a compliant was filed in the Supreme Court of the State
of New York alleging breach of contract. Specifically, the plaintiff
alleges that the Company defaulted under a promissory note issued to
plaintiff on May 16, 1996 in the amount of $175,000 (the "Rubin Note")
while such Note was outstanding and therefore that the Company is liable
and indebted to plaintiff in the principal amount of $175,000, together
with interest and expenses. The Company, on May 2, 1997, paid the
principal and interest due under the Rubin Note.
The main remaining issue asserted by the plaintiff is whether, pursuant to
an alleged related agreement, the plaintiff is entitled to 152,174 shares
(adjusted to reflect stock splits) of Common Stock or, alternatively,
$875,000. Plaintiff alleges that the Company undertook to enter into a
securities purchase agreement pursuant to which he should have received the
aforementioned shares of Common Stock. The Company contends that such
securities purchase agreement was never discussed and therefore that no
agreement was reached with respect to the terms thereof. Such securities
purchase agreement was not signed by either of the parties to the Rubin
Note. There is a status conference scheduled for December 18, 1998 at the
Supreme Court of The State of New York. The Company believes that it has
meritorious defenses to the above-described claims and it intends to defend
the litigation vigorously. However, due to the nature of litigation and
because the lawsuit is in the initial stages, the Company cannot determine
the total expense or possible loss, if any, that may ultimately be incurred
either in the context of a trial or as a result of a negotiated settlement.
While management believes that the resolution of this matter will not have
a material adverse effect on the Company's business, financial condition
and results of operations, the results of these proceedings are uncertain
and there can be no assurance to that effect. Regardless of the ultimate
outcome of the litigation, it could result in significant diversion of time
by the Company's personnel.
5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto included
elsewhere in this Quarterly Report on Form 10-QSB. Except for the historical
information contained herein, the discussion in this Report contains certain
forward-looking statements, within the meaning of Section 27A of the Securities
Act and Section 27E of the Exchange Act, that involve risks and uncertainties,
such as statements of the Company's plans, objectives, expectations and
intentions. Forward-looking statements are based on management's current
expectations and are subject to a number of risks and uncertainties that could
cause actual results to differ materially from expected results. The cautionary
statements made in this Quarterly Report should be read as being applicable to
all related forward-looking statements wherever they appear in this Quarterly
Report. Factors that could cause or contribute to such differences include
those discussed in "Risk Factors," as well as those discussed elsewhere herein.
Overview
Since June 1992, the Company has devoted substantially all of its resources
to upgrade and improve the Company's existing line of instrumentation (Mass
Spectrometers, Luminoscopes, etc.), electronic components and software and to
initiate the Company's strategy of carving out new and commercially promising
areas of application for its instrumentation and its scientific expertise and
capabilities, as well as finding new technologies that lie within its technical
purview for licensing and commercialization. The result of these efforts is the
present availability for sale of a fully upgraded line of magnetic sector mass
spectrometers, improved Luminoscope add-ons, and high-performance software for a
variety of applications in the petrochemical, environmental and geochemical
areas, among others. In addition, the Company has acquired (i) a license for a
DNA Sequencer that is in the process of being brought to the commercial
marketplace, (ii) an option for an instrument-intensive diagnostic technique
that the Company believes may allow physicians to rapidly measure the efficacy
of an individual drug or treatment modality and therefore assist in the
prevention and therapy of many diseases and (iii) a license for technology
involving the rapid measurement of pulmonary function. As most of the Company's
products are still under development, limited revenues have been derived from
the sale of these products and the Company does not expect to receive
substantial revenues from the sale of its products until at least 1999, at the
earliest.
The Company has financed its operations primarily though the private sale
and issuance of equity securities and proceeds from an initial public offering
(the "Public Offering") of equity securities during September 1997. The Company
expects to enter into collaborative agreements for the financing of its research
and development efforts and for the commercialization of its products. The
Company has been selected for a Phase II award by the Department of Energy's
Small Business Innovations Research Program (the "SBIR Grant"). The total
amount of the award is $750,000. However, no assurance can be given that the
Company will obtain significant revenues therefrom.
The Company has not been profitable since inception and had an accumulated
deficit of $10,197,606 at September 30, 1998. Successful future operations
depend upon the Company's ability to develop and commercialize its products.
The Company will require additional funds to complete the development of its
products and to fund operating losses that are expected to be incurred in the
next several years.
Results of Operations
Six Months Ended September 30, 1998 and 1997
The Company had total revenues of $131,490 and $123,421 for the six months
ended September 30, 1998 and 1997, respectively. Revenues for both periods
reflect sales of products from old product lines. To date, the Company has
received limited revenues from the sale of products, and it does not expect to
receive significant product revenue for several years, if at all. The increase
in revenues of $8,069, or approximately 7%, was due primarily to the increase in
Luminoscope sales. Cost of revenues were $255,681 and $176,071 during the six
months ended September 30, 1998 and 1997, respectively, an increase of $79,610,
or approximately 45%. The reason for the increase in the cost of revenues is
due in part to increased revenues and the Company's hiring and training of
additional manufacturing personnel.
6
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Of the total revenues discussed above, revenues derived from the sale of
the Company's services totaled $23,911 and $37,542 for the six months ended
September 30, 1998 and 1997, respectively. The decrease in service revenue was
$13,631, or approximately 36%. This decrease was due primarily to the increased
focus of the Company on its various research and development and
commercialization efforts, which resulted in the shifting of key personnel from
sales and marketing into such activities, and secondarily to the historical lack
of any full time sales and marketing staff.
Research and development expenses increased $166,852 in 1998 to $676,708
from $509,856 in 1997, due primarily to increased expenditures for the Company's
new licensed technologies. The proceeds of the Public Offering during the first
half of the fiscal year ended March 31, 1998 enabled the Company to increase its
research and development activities, which are dependent primarily on cash
availability. The Company anticipates that research and development expenses
will increase for fiscal year 1999 as a result of expenses relating to its
option and research and development agreements with the University of
California, Berkeley, its license agreement with Ames Laboratory/Iowa State
University and its license and research and development agreements with the
University of Pennsylvania, and the ability to fund such activities from the
proceeds of the Public Offering.
General and administrative expenses were $839,694 and $432,989 during the
six months ended September 30, 1998 and 1997, respectively, an increase of
$406,705, or approximately 94%. Approximately 70% and 71% of general and
administrative expenses for the six months ended September 30, 1998 and 1997,
respectively, were attributable to payroll, payroll taxes, employee benefits and
professional and consulting services. Other increases were due primarily to
increases in insurance expenses. The Company expects its general and
administrative expenses to increase in the future as a result of further Company
expansion.
Interest expense of $2,264 and $129,286 for the six months ended September
30, 1998 and 1997, respectively, resulted from borrowings. Interest expense
decreased primarily as a result of reduced borrowings. The obligations which
caused such interest expense in 1997 were repaid during September 1997 and
October 1997.
Three Months Ended September 30, 1998 and 1997
The Company had total revenues of $64,592 and $36,337 for the three months
ended September 30, 1998 and 1997, respectively, an increase of $28,255, or
approximately 77%. Revenues for both periods reflect sales of products from old
product lines. To date, the Company has received limited revenues from the sale
of products, and it does not expect to receive significant product revenue for
several years, if at all. The increase in total revenues was due primarily to
an increase in Luminoscope sales. Cost of revenues were $125,597 and $78,772
during the three months ended September 30, 1998 and 1997, respectively, an
increase of $46,825, or approximately 59%. The reason for the increase in the
cost of revenues is due in part to increased revenues and the Company's hiring
and training of additional manufacturing personnel.
Of the total revenues, revenues derived from the sale of the Company's
services totaled $6,525 and $25,124 for the three months ended September 30,
1998 and 1997, respectively, a decrease of $18,599, or approximately 74%. The
decrease in services revenues was due primarily to the increased focus of the
Company on its various research and development and commercialization efforts,
which resulted in the shifting of key personnel from sales and marketing into
such activities, and secondarily to the historical lack of any full time sales
and marketing staff.
Research and development expenses decreased 9% to $225,704 for the three
months ended September 30, 1998 from $247,417 for the three months ended
September 30, 1997. The decrease was due primarily to research funds dispensed
to the company from the SBIR Grant thereby reducing the research and development
expense of the company. The Company anticipates that research and development
expenses will increase for fiscal year 1999 as a result of expenses relating to
its option and research and development agreements with the University of
California, Berkeley, its license agreement with Ames Laboratory/Iowa State
University and its license and research and development agreements with the
University of Pennsylvania, and the ability to fund such activities from the
proceeds of the Public Offering.
General and administrative expenses increased 170% to $478,942 for the
three months ended September 30, 1998 from $177,173 for the three months ended
September 30, 1997. This increase was due primarily to the increases in payroll,
payroll taxes, employee benefits, consulting services and insurance expense.
7
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Interest expense of $1,084 and $60,424 for the three months ended September
30, 1998 and 1997, respectively, resulted from borrowings. Interest expense
during the three months ended September 30, 1998 decreased over the three months
ended September 30, 1997 primarily as a result of the repayment of borrowings
with the proceeds of the Company's initial public offering.
Liquidity and Capital Resources
In September 1997, the Company completed the Public Offering. The net
proceeds from the Public Offering were $5,198,055 (gross proceeds of $6,903,450
less related costs of $1,705,395). The Company believes that the proceeds
received from the Public Offering, together with future revenue and possible
future collaborative agreements and/or government grants, will be sufficient to
meet the Company's operating expenses and capital requirements into the
Company's third fiscal quarter of the fiscal year ending March 31, 1999. The
Company will attempt to raise any required additional funds through equity or
debt financings, collaborative arrangements with corporate partners or from
other sources if and when available. There can be no assurance that any such
additional funding will be available on favorable terms from any of these
sources, if at all.
In July 1997, the Company renegotiated the terms of the Bridge Financing
with its note holders. Under the revised terms, one-half the face amount of the
promissory notes ($805,000) was converted into warrants (the "Warrants") to
purchase Units (each Unit consisting of Common Stock and one Redeemable
Warrant). The Warrants to purchase 322,000 Units (16.1 Units multiplied by
20,000) are exercisable for four years commencing September 16, 1998 at an
exercise price of $5.75 per Unit (the Public Offering price). The outstanding
principal and interest due under the promissory notes was paid in September
1997. Additional obligations of approximately $252,000 were also written off or
otherwise settled during the year ended March 31, 1998. A portion of the
proceeds of the Bridge Financing was used to expedite the commercialization
effort on the DNA Sequencer and to complete the manufacture of the
instrumentation prototypes for the diagnostic kinetics project. In addition to
the purchase of materials for these projects, the Company has hired additional
scientists and lab technicians. In addition to the sales of the Company's new
products, the sales of the Company's current product lines are expected to
stimulate the sales of core product instrumentation.
The Company expects its cash requirements to increase in future periods.
The Company will require additional funds to conduct research and development,
pay various required license and milestone fees, establish third-party
collaborations and market its products. The Company's capital requirements
depend on many factors, including the status of the development of its products,
obtaining manufacturing capabilities to produce its products in volume,
prosecuting and enforcing its intellectual property right, competing
technological and market developments, and the ability of the Company to develop
new collaborative and licensing arrangements.
Year 2000 Compliance
The Company is in the process of assessing the impact of year 2000 on its
operations and systems, including those of its suppliers and collaborators and
other third parties. Management is in the process of formalizing its assessment
procedures and developing a plan to address identified issues, if any. To date,
the Company has evaluated its financial and accounting systems and believes that
these systems are not and will not be materially affected by the year 2000. The
Company does not yet know the extent, if any, of the impact of the year 2000 on
its other systems and equipment or those of third parties with which the Company
does business. There can be no assurance that third parties, such as suppliers,
clinical research organizations and collaborative parties, are using systems
that are year 2000 compliant or will address any year 2000 issues in a timely
fashion, or at all. Any year 2000 compliance problems of either the Company,
its suppliers, its clinical research organizations, or its collaborative
partners could have a material adverse effect on the Company's business,
operating results and financial conditions.
Future Outlook
In addition to historical information, this report contains predictions,
estimates and other forward-looking statements that involve a number of risks
and uncertainties. These risks and uncertainties include the fact that
SpectruMedix is still a relatively young company and has not yet completed a
full cycle of development, regulatory approval and commercialization for any of
its products. The regulatory processes through which some of the Company's
products must proceed are complex, uncertain and costly, and no assurance can be
given regarding the timing of regulatory progress or that the Company will be
successful in commercializing any of its product candidates. These development
processes require substantial amounts of funding, and the Company is dependent
on corporate partners
8
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and the equity markets to finance such efforts. Where access to funding is
difficult, the Company's stockholders may face significant dilution, and the
ability of the Company to proceed with its programs and plans may be
significantly and adversely affected. Actions and advances by competitors may
also significantly affect the Company's prospects, as may the existence of
patents held by such competitors or potential competitors.
9
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RISK FACTORS
In addition to the other information contained herein, the discussion in
this Quarterly Report on Form 10-QSB contains certain forward-looking
statements, within the meaning of Section 27A of the Securities Act and Section
27E of the Exchange Act, that involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations and intentions.
Actual results could differ materially from those discussed in the forward-
looking statements as a result of certain factors, including those set forth
below and elsewhere in this Report. Factors that could cause or contribute to
such differences include those discussed below as well as those cautionary
statements and other factors set forth elsewhere herein.
History of Losses; Uncertainty of Future Profitability; Ability To Continue
as a Going Concern. The Company has incurred operating losses since its
inception in 1992. At September 30, 1998, the Company had an accumulated deficit
of $10,197,606. The Company's current revenues from operations are limited and
are not sufficient to fund its operating expenses. The Company will need to
either substantially expand the sales of its existing products and services or
successfully develop and commercialize its new products to reach profitability.
No assurance can be given that the Company will be able to accomplish either
such objective. The Company will be required to conduct significant research,
development, testing and regulatory compliance activities which, together with
projected general and administrative expenses, are expected to result in
operating losses for at least the next several years. The Company may not
achieve significant revenues or profitable operations. To date the Company's
operations have been characterized by chronic underfunding and limited ability
to maintain inventories of key components, parts and supplies. The Company is
dependent upon the proceeds of its initial public offering (the "Public
Offering") to continue its operations. In addition, the proceeds of the Public
Offering may not be sufficient to allow the Company to materially alter its
reliance on "just-in-time" manufacturing and the inherent dependence upon
sources of components, parts and supplies. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
As a result of the Company's current financial condition, the Company's
independent accountants have included an emphasis of matter disclosure in their
report on the Company's financial statements for the period ended March 31,
1998. The independent accountants report on the Company's financial statements
includes an explanatory paragraph stating that the net losses and accumulated
deficit raise substantial doubt about the Company's ability to continue as a
going concern.
Early Stage of Development. Since the Company's incorporation in April
1992, the Company has been engaged in organizational activities, acquisition of
assets, hiring of personnel and financing activities. Since operations began in
July 1992, the Company has engaged in the following activities: manufacturing,
research and development, limited sales and marketing, capital raising,
exploration of strategic relationships and collaborations, and other general
corporate activities. The Company has generated limited revenues to date. While
the Company is able to finance certain of its current operations from revenues,
it requires substantial additional financing to continue to increase its
marketing capabilities and increase its research and development activities to
expand the applications of its core technology, to acquire additional
technologies, and to develop new products. As the Company is in the development
stage, its operations are subject to all of the risks inherent in the
establishment of a new business enterprise and the commercialization of new
products. The likelihood of the success of the Company must be considered in
light of the problems, expenses, difficulties, complications and delays
frequently encountered in connection with a new business, and, accordingly, is
highly speculative.
Uncertainty Regarding Completion of Licenses to Key Technologies. The
Company's technologies under development in the area of diagnostic kinetics are
the subject of an option held by the Company from the University of California,
Berkeley. Such option specifies maximum royalty rates and milestone payments,
which the Company deems reasonable. Although the option agreement entitles the
Company to exercise its option and acquire an exclusive license to the
underlying patents and technologies, no assurance can be given that the Company
will be successful in securing such license or that the terms thereof will
ultimately be deemed attractive for the commercialization of such equipment. The
Company does not expect to exercise its option with the University of
California, Berkeley until the second half of 1998, at the earliest.
Uncertainty of Protection of Patents and Proprietary Rights. The Company's
success depends on its ability to obtain patents, protect its trade secrets and
operate without infringing upon the proprietary rights of others. The
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Company's existing and potential competitors have applied for a substantial
number of patents. There can be no assurance that any of the Company's future
patent applications will be approved, that the Company will develop additional
proprietary products that are patentable, or that any patents issued to the
Company will provide the Company with any significant protection or will not be
successfully challenged by third parties. Furthermore, there can be no assurance
that others will not design around the patented products developed by the
Company. There can be no assurance that the Company's products will not be found
to infringe upon the patents of others. The area of gene sequencing, in
particular, is subject to intense competition and active filing of patent
applications. Any of such patent applications filed by one or more third parties
may conflict with the Company's products under development. If the Company's
products are found to infringe upon the patents or otherwise impermissibly
utilize the intellectual property of others, the Company's development,
manufacture and sale of such products could be severely restricted or
prohibited. Any such infringement could have a material adverse effect on the
Company's prospects, business, results of operations or financial condition. The
Company may be required to obtain licenses from such third parties or otherwise
obtain licenses to utilize patents or proprietary rights of others. No assurance
can be given that any licenses required under any such patents or proprietary
rights could be obtained on terms acceptable to the Company, or at all. If the
Company does not obtain such licenses, the development, manufacture or sale of
products requiring such licenses could be materially adversely affected. If the
Company does not obtain such licenses, it could encounter delays in product
introductions while it attempts to design around such patents, or could find
that the development, manufacture or sale of such products could be foreclosed.
Litigation may be necessary to defend against or assert claims of infringement,
to enforce the Company's or its licensors' patents, to protect trade secrets or
know-how owned by the Company, or to determine the scope and validity of the
proprietary rights of others, and could result in substantial cost to and
diversion of effort by, and may have a material adverse impact on, the Company.
The Company's competitive position is also dependent upon unpatented trade
secrets. Although the Company takes measures to protect its trade secrets, trade
secrets are difficult to protect. There can be no assurance that others will not
independently develop substantially equivalent proprietary information or
techniques or otherwise gain access to the Company's trade secrets. The Company
pursues a policy of having its employees, consultants and advisors execute
confidentiality agreements to maintain the proprietary nature of its technology.
There can be no assurance, however, that these agreements will provide
meaningful protection for the Company's trade secrets or other proprietary
information in the event of unauthorized use or disclosure of such information.
Technological Uncertainty; Uncertainty of Product Development and
Commercialization; Early Stage of Product Development. The science and
technology of the Company's products, particularly the Company's DNA Sequencer,
is rapidly evolving. Many of the Company's products and proposed products will
require significant further research, development, testing and possibly
regulatory clearances and are subject to the risks of failure inherent in the
development of products based on innovative technologies. The Company's
development efforts in the areas of diagnostic kinetics and pulmonary
diagnostics involve new areas of medicine which necessarily involves
unforeseeable risks and uncertainties. These risks include the possibility that
any or all of the products or proposed products are found to be ineffective or
unsafe, or otherwise fail to receive necessary regulatory clearances, if any,
that the proposed products, although effective, are uneconomical to market, that
such products will not satisfy cost and performance criteria, that third parties
hold proprietary rights that preclude the Company from marketing such products,
or that third parties market a superior or equivalent product. Accordingly, the
Company is unable to predict whether its research and development activities
will result in any commercially viable products other than the Company's mass
spectrometers. Further, the Company cannot predict with certainty when or if the
Company will be able to commercialize certain of its proposed products or that
such products will satisfactorily perform all of the functions for which they
have been designed or prove to be sufficiently reliable in long-term
applications.
New Concept and Emerging Markets; Uncertainty of Market Acceptance. The
production of the DNA Sequencer, diagnostic kinetics instruments, pulmonary
diagnostics technology and other proposed products of the Company represents new
manufacturing processes which are untested on a commercial scale. Although the
Company believes that its technologies and products will, if ultimately
commercialized, represent significant technological advances, demand for the
Company's proposed products, all of which are based upon new designs, concepts
and manufacturing processes, is subject to a high degree of uncertainty. Many
potential customers of the Company, including original equipment manufacturers
("OEM") and commercial end users, may be reluctant to utilize or sell the
Company's proposed products until a sufficient number of other OEMs and
commercial end users have already committed to do so. The Company currently has
limited marketing experience and limited financial,
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personnel and other resources to undertake the extensive marketing activities
that will be necessary to market its proposed products. The Company's ability to
generate revenues from the sale of its proposed products will be dependent upon,
among other things, its ability to build an effective sales organization. In its
limited marketing efforts to date, the Company has relied solely upon the
efforts of its executive officers. If the Company is unable to market and
distribute its products directly, the Company may have to enter into
arrangements with others, such as joint ventures, licensing or similar
arrangements or distribution agreements. Any such contractual arrangements may
result in a lack of control by the Company over any or all of the marketing and
distribution of such products and may increase its marginal costs. There can be
no assurance that the Company will be able to formalize any marketing
arrangements or that its marketing efforts will be successful.
Limited Manufacturing Experience and Capabilities; Risks Associated with
Expansion of Manufacturing Operations; Possible Dependence on Third-Party
Manufacturers. The Company maintains limited manufacturing facilities and will
need to expand such facilities to effectively manufacture its products on a
profitable basis. Although certain members of the Company's management have
manufacturing experience, the expansion of the Company's manufacturing
facilities and capabilities will subject the Company to numerous risks,
including unanticipated technological problems or delays. Such expansion will
also require additional sources of capital, which may not be available on
commercially reasonable terms, if at all. In the event that the Company is
unable to expand its manufacturing facilities and capabilities, the Company
maybe required to enter into arrangements with others for the manufacture and
packaging of its proposed products. There can be no assurance that the Company
will be able to enter into any such arrangements on commercially reasonable
terms, or at all, or that the Company will ever be able to establish the
capability to manufacture its products on a commercial basis, in which case the
Company's business, results of operations and financial condition would be
materially adversely affected.
Assets Encumbered; Potential Litigation. The Company's assets are
encumbered by liens and security interests granted in favor of certain of the
Company's creditors. A majority of the obligations that gave rise to such liens
and security interests have been repaid with the proceeds of the Public Offering
and the liens and security interests resulting therefrom are in the process of
being released. Two parties have filed security interests, which are still
outstanding, for obligations aggregating $130,000. In the event that any party
holding a security interest should execute such security interest, the Company's
assets could be subject to seizure. In such event, the Company would be
materially adversely affected. In the event the Company should become party to
any litigation relating to these obligations, the costs of defending against
such claims could be substantial, and the Company could be materially adversely
affected.
Dependence on Third-Party Suppliers of Raw Materials and Components;
Relationships with Suppliers, Creditors and Customers. The Company's existing
and proposed products require high quality raw materials and components which
the Company currently purchases and will continue to purchase from third-party
suppliers. The Company believes that adequate sources of supply exist for all of
the raw materials and components that it will need and that such items are
available on commercially reasonable terms. Certain raw materials or components
may, however, from time to time, be difficult to obtain and may cause production
delays or require the Company to find alternate means of production. Thus, the
Company's ability to manufacture its products will depend on its ability to
establish and maintain commercial relationships with at least certain of such
suppliers. The Company does not currently maintain supply agreements with any
of its suppliers.
The Company's production will also be dependent upon its suppliers
satisfying the Company's performance and quality specifications and dedicating
sufficient production capacity to meet the Company's scheduled delivery times.
There can be no assurance that the Company will be able to establish any
commercial relationships with suppliers or, if it is able to do so, that such
suppliers will be able to satisfy the Company's scheduled delivery or
performance requirements or have sufficient production capacity to satisfy such
requirements during any period of sustained demand. Failure or delay by the
Company's suppliers in supplying the Company with needed raw materials and
components would materially adversely affect the Company's operating margins and
the Company's ability to manufacture and deliver products on a timely and
competitive basis, which could, in turn, have a material adverse effect on the
Company.
Effect of Chronic Inadequate Capitalization on Relationships with
Suppliers, Creditors and Customers. Since inception, the Company has been
characterized by chronic inadequate capitalization. Accordingly, the Company's
lack of working capital has at times prevented the Company from making timely
payments to suppliers
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and creditors or from repairing relationships with such entities. Such financial
difficulties have also prevented the Company from providing parts and service to
certain of its customers in a timely manner. As a result, the Company's
relationships with its customers have also been damaged. The deterioration of
these relationships may make the Company's strategy for expansion more difficult
and may adversely affect the development of the Company's business. There can be
no assurance that the Company will be able to reestablish relationships with its
suppliers, creditors and customers or that the Company will successfully
implement its expansion plan.
Customer Concentration. Approximately 63% and 48% of the Company's net
sales for the years ended March 31, 1998 and 1997, respectively, were derived
from sales to the Company's top five customers. During the fiscal year ended
March 31, 1998 the Company's product sales amounted to approximately 15%, 14%,
13% and 12% to four separate customers. During the fiscal year ended March 31,
1997, product sales consisted of approximately 13% to one customer and 11% to
another customer. The loss of, or significant adverse change in, the
relationship between the Company and these customers could have a material
adverse effect on the Company's business, financial condition and results of
operations. The loss of or reduction in orders from any significant customer,
losses arising from customer disputes regarding shipments, fees, merchandise
condition or related matters, or the Company's inability to collect accounts
receivable from any major customer could have a material adverse impact on the
Company's business, financial condition and results of operations.
Competition and Technological Changes. The Company's success depends upon
establishing and maintaining a competitive position in the research, development
and commercialization of products and technologies in its areas of focus. The
medical and industrial instrumentation industry is highly competitive and
requires substantial capital. The Company competes with, and will compete with,
numerous international, national and regional companies, many of which have
significantly larger operations and greater financial, marketing, human and
other resources than the Company. Accordingly, such competitors may have
substantial competitive advantages over the Company, including the ability to
negotiate favorable supply and distribution agreements and the ability to
negotiate more favorable terms with developers of technology, including
universities. In addition, the Company plans to develop additional products and
acquire additional technologies in order to expand the Company's product and
technology portfolio. No assurance can be given that the Company will
successfully compete in any market in which it conducts or may conduct
operations or that developments by such competitors will not render the
Company's current or future products or technologies uncompetitive or obsolete.
The industry in which the Company competes is characterized by rapid
technological change. Although the basic technology of mass spectrometry has not
changed significantly in many years, its applications and enhancements, as well
as competing measurement and analysis technologies, are constantly developing.
There can be no assurance that the Company's products will not be rendered
obsolete as a result of technological developments. The Company is actively
engaged in research and development to improve its products through the
introduction of enhancements and various additional applications, which by its
nature is uncertain. Accordingly, there can be no assurance that the Company
will be able to develop such new products or improvements.
Need for Additional Financing. Based on the Company's operating plan, the
Company believes that the net proceeds of the Public Offering, together with
future operating revenues and possible future collaborative agreements and/or
government grants, will be sufficient to satisfy its capital requirements and
finance its plans into the Company's third fiscal quarter of the fiscal year
ending March 31, 1999. Such belief is based on certain assumptions, and there
can be no assurance that such assumptions are correct. After such time, the
Company anticipates that it will require additional financing in order to meet
its current plans for expansion. Such financing may take the form of the
issuance of common or preferred equity securities or debt securities, or may
involve bank financing. The Company may also be forced to enter into third-party
licensing, manufacturing or distribution agreements to support its capital
needs. There can be no assurance that the Company will be able to obtain such
additional capital on a timely basis, on favorable terms, or at all. In any of
such events, the Company may be unable to implement its product development and
commercialization strategy and its operations would be severely and adversely
affected.
Dependence Upon Key Employees and Consultants; Recruitment of Additional
Personnel. The Company is dependent upon the efforts and abilities of Dr. Joseph
K. Adlerstein, its Chairman of the Board of Directors, Chief Executive Officer
and President, and Bernard Sonnenschein, its Secretary and Treasurer, and on
other members of its scientific and management staff. Dr. Adlerstein and Mr.
Sonnenschein are the only executive officers of the
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Company. In addition, the Company is dependent on collaborators at research
institutions and on the Company's scientific advisors and consultants.
Recruiting and retaining qualified personnel, collaborators, advisors and
consultants will be critical to the Company's success. To date, the Company has
been able to attract and retain the personnel necessary for its operations.
However, there can be no assurance that the Company will be able to do so in the
future, particularly in light of the Company's expansion plans. If the Company
is unable to attract and retain personnel with necessary skills when needed, its
business and expansion plans could be materially adversely affected.
Dr. Adlerstein and Mr. Sonnenschein are substantial stockholders of the
Company, holding approximately 19% and 17%, respectively, of the outstanding
shares. The Company has entered into an employment agreement with Dr.
Adlerstein. The loss or unavailability of the services of either Dr. Adlerstein
or Mr. Sonnenschein for any significant period of time could have a material
adverse effect on the Company's business prospects. The Company has obtained,
and is the sole beneficiary of, key-person life insurance in the amount of
$1,000,000 on the life of Dr. Adlerstein.
Product Warranties. The Company generally warranties parts and services for
each of its products for one year from the date of purchase. Although there have
been few requests for extensive servicing and repairs for products that have
already been sold by the Company during the warranty period, a large number of
requests for such servicing could have a material adverse effect on the Company
by requiring additional expenditures for parts as well as the repair efforts of
the Company's personnel.
Environmental and Other Governmental Regulations. A portion of the
Company's future products may be regulated by the United States Food and Drug
Administration (the "FDA"). Such regulations extend to manufacturing practices,
the conduct of clinical investigations, pre-market approval, record keeping and
reporting requirements and labeling, among other matters. To date the Company
has not yet obtained clearance from the FDA for commercial marketing of its
primary products. In addition, other products that the Company might develop may
also be subject to FDA regulation. There can be no assurance that the Company
will be able to obtain FDA clearance for commercial marketing of its products.
Even if FDA clearance is received, government regulation may have an adverse
impact on the timing and cost of new product introductions, may interfere with
the marketing of existing products and may require the recall of products from
customer locations.
The Company is subject to a variety of United States and foreign government
regulations related to the discharge or disposal of toxic, volatile or otherwise
hazardous chemicals used in its manufacturing process. The failure by the
Company to comply with present or future environmental regulations could result
in fines, suspension of production or cessation of operations. Such regulations
could also require the Company to acquire equipment or to incur other
substantial expenses to comply with environmental regulations. If substantial
additional expenses were incurred by the Company, product costs could
significantly increase, thus materially and adversely affecting the Company's
results of operations. Additionally, the Company is subject to a variety of
government regulations relating to its operations, such as environmental, labor
and export control regulations. While the Company believes it has obtained all
permits necessary to conduct its business, the failure to comply with present
and future regulations could result in fines being imposed on the Company or
suspension or cessation of operations. Any failure by the Company to control the
use of, or adequately restrict the discharge of, hazardous substances could
subject the Company to future liabilities, and could have a material adverse
effect on the Company's business and results of operations.
Product Recalls and Liability. Products such as those sold by the Company
may be subject to recall for unforeseen reasons. In addition, certain projected
applications of the Company's products entail the risk of product liability
claims. The Company performs extensive testing of its products at each stage of
their design to minimize the risk of recall or product liability claims. A
recall or product liability claim could materially adversely affect the
Company's operation and reputation. The Company does not maintain any insurance
related to recalls or product liability and, accordingly, a product recall of
the Company's principal products or successful product liability claims against
the Company would have a material adverse effect on the Company.
Control by Management and Current Stockholders. The Company's current
management owns approximately 36% of the outstanding shares of Common Stock.
Management may, therefore, have the ability to elect a majority of the directors
of the Company and to control the outcome of all issues submitted to a vote of
the
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stockholders of the Company. The Company currently has three directors, two
of whom, Dr. Adlerstein and Mr. Sonnenschein, are insiders and principal
stockholders. Accordingly, such individuals are in a position to control the
actions and decisions of the Board of Directors
Year 2000 Compliance. The Company is in the process of assessing the impact
of year 2000 on its operations and systems, including those of its suppliers and
collaborators and other third parties. Management is in the process of
formalizing its assessment procedures and developing a plan to address
identified issues, if any. To date, the Company has evaluated its financial and
accounting systems and believes that these systems are not and will not be
materially affected by the year 2000. The Company does not yet know the extent,
if any, of the impact of the year 2000 on its other systems and equipment or
those of third parties with which the Company does business. There can be no
assurance that third parties, such as suppliers, clinical research organizations
and collaborative parties, are using systems that are year 2000 compliant or
will address any year 2000 issues in a timely fashion, or at all. Any year 2000
compliance problems of either the Company, its suppliers, its clinical research
organizations, or its collaborative partners could have a material adverse
effect on the Company's business, operating results and financial conditions.
Possible Volatility of Stock Price. There can be no assurance that an
active trading market for the Common Stock or Redeemable Warrants will be
sustained in the future. The market price of the shares of Common Stock and the
Redeemable Warrants, like that of many other small cap and emerging technology
companies, is likely to be highly volatile.
Absence of Dividends. The Company has not paid any cash dividends on the
Common Stock since inception and does not intend to pay any dividends to its
stockholders in the foreseeable future. The Company currently intends to
reinvest earnings, if any, in the development and expansion of its business.
Shares Eligible for Future Sale May Adversely Affect the Market. 2,173,100
shares of the Company's outstanding shares of Common Stock are "restricted
securities." All of such restricted securities are available for sale pursuant
to Rule 144 as described below commencing December 15, 1997, 100,438, 560,015
and 1,512,647 of which are subject to a 13-month, 12-month and 24-month,
respectively, restriction against transfer, each commencing September 16, 1997.
The officers and directors of the Company, who own an aggregate of 1,227,393 of
the 2,173,100 above-referenced shares have agreed not to sell, assign or
transfer any securities of the Company owned by them until September 16, 1999
without the prior consent of Patterson Travis, Inc., the underwriter of the
Public Offering (the "Underwriter"). Rule 144 provides, in essence, that a
person holding "restricted securities" for a period of one year may sell only an
amount every three months equal to the greater of (a) one percent of the
Company's issued and outstanding shares or (b) the average weekly volume of
sales during the four calendar weeks preceding the sale. The amount of
"restricted securities" which a person who is not an affiliate of the Company
may sell is not so limited, since non-affiliates may sell without volume
limitation their shares held for two years if there is adequate current public
information available concerning the Company. In such an event, "restricted
securities" would be eligible for sale to the public at an earlier date. The
sale in the public market of such shares of Common Stock may adversely affect
prevailing market prices of the Common Stock.
Effect of Outstanding Options and Warrants. At September 30, 1998, there
were outstanding stock options to purchase an aggregate of 127,827 shares of
Common Stock at an exercise price of $0.00115 per share, warrants to purchase an
aggregate of 100,000 shares of Common Stock at an exercise price of $1.00 per
share, stock options and warrants to purchase an aggregate of 247,829 shares of
Common Stock at an exercise price of $2.88 per share, stock options to purchase
an aggregate of 207,836 shares of Common Stock at an exercise price of $4.60 per
share, stock options to purchase an aggregate of 35,000 shares of Common Stock
at an exercise price of $5.00 per share, stock options to purchase an aggregate
of 25,000 shares of Common Stock at an exercise price of $6.00 per share, stock
options to purchase an aggregate of 68,000 shares of Common Stock at an exercise
price of $6.25 per share, stock options to purchase an aggregate of 100,000
shares of Common Stock at an exercise price of $9.125 per share, stock options
to purchase an aggregate of 100,000 shares of Common Stock at an exercise price
of $2.75 per share warrants to purchase 322,000 Units at an exercise price of
$5.75 per Unit and warrants to purchase 104,400 Units at an exercise price of
$9.49 per Unit. Of the foregoing, warrants and options to purchase 534,578
shares of Common Stock are subject to a 24-month lock-up restriction and up to
174,000 shares issued or to be issued to one stockholder are subject to a 13-
month lock-up restriction. Each of the foregoing lock-up restriction periods
commenced on September 16, 1997. The lock-up restriction for the warrants to
purchase 322,000 Units expired on
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September 15, 1998. The exercise of such outstanding options and warrants will
dilute the percentage ownership of the Company's stockholders, and any sales in
the public market of shares of Common Stock underlying such securities may
adversely affect prevailing market prices for the Common Stock. Moreover, the
terms upon which the Company will be able to obtain additional equity capital
may be adversely affected since the holders of such outstanding securities can
be expected to exercise their respective rights therein at a time when the
Company would, in all likelihood, be able to obtain any needed capital on terms
more favorable to the Company than those provided in such securities.
Current Prospectus and State Blue Sky Registration Required to Exercise
Redeemable Warrants. The Company will be able to issue shares of its Common
Stock upon exercise of the Redeemable Warrants only if there is then a current
prospectus relating to such Common Stock and only if such Common Stock is
qualified for sale or exempt from qualification under applicable state
securities laws of the jurisdictions in which the various holders of the
Redeemable Warrants reside. The Company has undertaken and intends to file and
keep current a prospectus which will permit the purchase and sale of the Common
Stock underlying the Redeemable Warrants, but there can be no assurance that the
Company will be able to do so. Although the Company intends to seek to qualify
for sale the shares of Common Stock underlying the Redeemable Warrants in those
states in which the securities are to be offered, no assurance can be given that
such qualification will occur. The Redeemable Warrants may be deprived of any
value and the market for the Redeemable Warrants may be limited if a current
prospectus covering the Common Stock issuable upon the exercise of the
Redeemable Warrants is not kept effective or if such Common Stock is not
qualified or exempt from qualification in the jurisdictions in which the holders
of the Redeemable Warrants then reside.
Potential Adverse Effect of Redemption of Redeemable Warrants. The
Redeemable Warrants may be redeemed by the Company at a redemption price of $.01
per Redeemable Warrant upon 30 days written notice given at any time after
September 16, 1998 in the event that the market price of the Common Stock equals
or exceeds $10.00 per share. "Market price" shall mean: (i) the average closing
sale price of the Common Stock, for any 10 consecutive trading days within a
period of 30 consecutive trading days ending within five days of the date of
notice of redemption, as reported on the National Association of Securities
Dealers, Inc. ("NASD") Automated Quotation System or the NASD Electronic
Bulletin Board or (ii) the average of the last reported sales price of the
Common Stock for the 10 consecutive business days ending within five days of the
date of notice of redemption, on the primary exchange on which the Common Stock
is traded, if traded on a national securities exchange. Notice of redemption of
the Redeemable Warrants could force the holders to exercise the Redeemable
Warrants and pay the exercise price at a time when it may be disadvantageous for
them to do so, to sell the Redeemable Warrants at the current market price when
they might otherwise wish to hold the Redeemable Warrants, or to accept the
redemption price which would be substantially less than the market value of the
Redeemable Warrants at the time of redemption.
Preferred Stock; Possible Anti-Takeover Effects. The Company's Certificate
of Incorporation, as amended, authorizes the Board of Directors to issue up to
2,000,000 shares of preferred stock, par value $0.00115 per share. The
preferred stock may be issued in one or more series, the terms of which maybe
determined at the time of issuance by the Board of Directors, without further
action by stockholders, and may include voting rights (including the right to
vote as a series on particular matters), preferences as to dividends and
liquidation, conversion and redemption rights, and sinking fund provisions. No
preferred stock is currently outstanding, and the Company has no present plans
for the issuance of any preferred stock. The Company has agreed not to issue any
shares of preferred stock without the Underwriter's consent until September 16,
1999. However, the issuance of any such preferred stock could materially
adversely affect the rights of holders of Common Stock and, therefore, could
reduce the value of the Common Stock. In addition, specific rights granted to
future holders of preferred stock could be used to restrict the Company's
ability to merge with, or sell its assets to, a third party. The ability of the
Board of Directors to issue preferred stock could discourage, delay, or prevent
a takeover of the Company, thereby preserving control of the Company by the
current stockholders.
No Assurance of Public Trading Market. Prior to the Public Offering, there
was no established trading market for the Units, Common Stock and Redeemable
Warrants and there is no assurance that a regular trading market for such
securities on The Nasdaq Stock Market, or any other exchange, will be sustained
in the future. Although the Company's securities are included on the OTC
Bulletin Board, there can be no assurance that a regular trading market for the
securities will be sustained in the future. The OTC Bulletin Board is an
unorganized, inter-
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dealer, over-the-counter market which provides significantly less liquidity than
The Nasdaq Stock Market, and quotes for stocks included on the OTC Bulletin
Board are not listed in the financial sections of newspapers as are those for
The Nasdaq Stock Market. Therefore, prices for securities traded solely on the
OTC Bulletin Board may be difficult to obtain and purchasers of the Units may be
unable to resell the securities offered hereby at or near their original
offering price or at any price. In the event the securities are not included on
the OTC Bulletin Board, quotes for the securities may be included in the "pink
sheets" for the over-the-counter market. See "--`Penny Stock' Regulations May
Impose Certain Restrictions on Marketability of Securities."
"Penny Stock" Regulations May Impose Certain Restrictions On Marketability
Of Securities. The Securities and Exchange Commission (the "Commission") has
adopted regulations which generally define "penny stock" to be any equity
security that is not traded on a national securities exchange or Nasdaq and that
has a market price of less than $5.00 per share or an exercise price of less
than $5.00 per share, subject to certain exceptions. If the Company's securities
that are currently included on the OTC Bulletin Board are trading at less than
$5.00 per security at any time, the Company's securities may become subject to
rules that impose additional sales practice requirements on broker-dealers who
sell such securities to persons other than established customers and accredited
investors(generally, such investors have assets in excess of $1,000,000 or an
individual annual income exceeding $200,000, or, together with the investor's
spouse, a joint income of $300,000). For transactions covered by these rules,
the broker-dealer must make a special suitability determination for the purchase
of such securities and have received the purchaser's written consent to the
transaction prior to the purchase. Additionally, for any transaction involving a
penny stock, unless exempt, the rules require, among other things, the delivery,
prior to the transaction, of a risk disclosure document mandated by the
Commission relating to the penny stock market and the risks associated
therewith. The broker-dealer must also disclose the commission payable to both
the broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the penny stock rules may restrict
the ability of broker-dealers to sell the Company's securities and may affect
the ability of stockholders to sell the Company's securities in the secondary
market. See "-- No Assurance of Public Trading Market."
17
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. None.
-----------------
Item 2. Changes in Securities and Use of Proceeds.
-----------------------------------------
(a) Change in Securities. None.
--------------------
(b) Use of Proceeds.
---------------
The effective date of the Registration Statement (File No. 333-6650)
for which this Statement is made is September 16, 1997. The Company has been
assigned a CUSIP number of 84763K. The offering to which this statement relates
(the "Offering") commenced on September 17, 1997, did not terminate before any
securities were sold and, as of the date hereof, has not terminated. The
managing underwriter of the Offering was Patterson Travis, Inc. Pursuant to the
Offering, the Company registered (i) Common Stock, classified as an "equity"
security, (ii) Units, classified as "other" securities and (iii) Redeemable
Warrants, also classified as "other" securities. Each Unit consists of one
share of Common Stock and one Redeemable Warrant to purchase one additional
share of Common Stock. The Redeemable Warrants are exercisable at a price per
share of $7.50 for a period of four years commencing September 16, 1998 and are
subject to redemption by the Company at a redemption price of $0.01 per
Redeemable Warrant upon 30 days' written notice given at any time after
September 16, 1998 in the event that the market price of the Common Stock equals
or exceeds $10.00 per share.
The Company registered and sold 1,200,600 Units for an aggregate price
of $6,903,450. In connection with the Offering, the issuer allowed underwriting
discounts and commissions of $690,345 and incurred aggregate expenses of
$1,001,398, broken down as follows: a non-accountable expense allowance of
$207,104, a consulting fee in the amount of $100,000 and offering expenses of
$694,294. Net offering proceeds to the Company after deducting expenses were
$5,211,707. Of the net proceeds, approximately $120,000 has been used to pay
professional fees, approximately $1,620,000 has been used to repay indebtedness,
including approximately $75,000 of indebtedness to officers and directors of the
Company, and approximately $580,000 has been used towards repayment of accounts
payable. The remaining proceeds are to be allocated as set forth in the
prospectus (the "Prospectus") included in the Registration Statement. This use
of proceeds does not represent a material change in the use of proceeds
described in the Prospectus
Item 3. Defaults Upon Senior Securities. None.
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
(a) The Annual Meeting of Stockholders of SpectruMedix was held on
August 26, 1998.
(b) The following Directors were elected to serve until the
Company's 1999 Annual Meeting of Stockholders, or until their
successors are duly elected and qualified:
Joseph K. Adlerstein, Ph.D.
Bernard Sonnenschein
18
<PAGE>
(c) The matters voted upon at the meeting and voting of the
stockholders with respect thereto are as follows:
(i) The election of two directors to hold office until the
Company's 1999 Annual Meeting of Stockholders, or until
their successors are duly elected and qualified.
Nominee For Against
------- --- -------
Joseph K. Adlerstein, Ph.D. 1,856,562 5,465
Bernard Sonnenschein 1,856,562 5,465
(ii) Approval of a series of amendments to the Company's 1997
Stock Incentive Plan, including an increase in the total
number of shares of the Company's Common Stock authorized
for issuance thereunder from 500,000 shares to a total of
1,000,000 shares.
For Against Abstentions
--- ------- -----------
1,768,696 16,365 76,966
(iii) Ratification of the appointment of PriceWaterhouseCoopers
LLP as the Company's independent public accountants for
the fiscal year ending March 31, 1999.
For Against Abstentions
--- ------- -----------
1,838,937 14,365 8,725
Item 5. Other Information. None.
-----------------
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits.
--------
The following documents are referenced or included in this report:
Exhibit No.
-----------
27 Financial Data Schedule.
(b) Reports on Form 8-K.
-------------------
No Current Reports on Form 8-K were filed with the Commission
during the quarter ended June 30, 1989.
19
<PAGE>
SIGNATURES
----------
In accordance with the requirements of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed in its
behalf by the undersigned thereunto duly authorized.
SPECTRUMEDIX CORPORATION
DATED: November 13, 1998 By: /s/ Joseph K. Adlerstein
------------------------------------------
Joseph K. Adlerstein
President, Chief Executive Officer and
Chairman of the Board (Principal Executive
Officer)
DATED: November 13, 1998 By: /s/ Bernard Sonnenschein
------------------------------------------
Bernard Sonnenschein
Treasurer, Secretary and Director
(Principal Financial and Accounting Officer)
20
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED BALANCE SHEET AND UNAUDITED CONDENSED STATEMENT OF
OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 284,057
<SECURITIES> 0
<RECEIVABLES> 46,957
<ALLOWANCES> 0
<INVENTORY> 431,621
<CURRENT-ASSETS> 779,819
<PP&E> 551,764
<DEPRECIATION> 124,259
<TOTAL-ASSETS> 1,658,749
<CURRENT-LIABILITIES> 1,266,291
<BONDS> 0
0
0
<COMMON> 4,042
<OTHER-SE> 289,923
<TOTAL-LIABILITY-AND-EQUITY> 1,658,749
<SALES> 64,592
<TOTAL-REVENUES> 64,592
<CGS> 125,597
<TOTAL-COSTS> 704,646
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,084
<INCOME-PRETAX> (762,462)
<INCOME-TAX> 0
<INCOME-CONTINUING> (762,462)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (762,462)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
